ISLAMABAD (June 05 2010): The Economic Survey failed to adequately take account of domestic factors that contributed to inflation, and cited high commodity prices in the global market as a major cause of price hike in the country. The Economic Survey, released here on Friday jointly by the high-ups of the Ministry of Finance and the Planning Commission, mentioned house rent as the biggest contributor to year-on-year inflation.

However, it was not clear as to what yardstick and location/area was taken to calculate the rent. According to the Economic Survey, the refuelling of inflationary pressure was evident in all major price indices with Wholesale Price Index (WPI) inflation rising steeply from 0.3 percent in August 2009 to 22 percent in April 2010.

Similarly, the Sensitive Price Index (SPI) recorded a 16.7 percent year-on-year increase for April versus 6.7 percent in October 2009. The rise in inflation, the Survey said, was largely because of sharp spike in global commodity prices, relating to food and energy, which persisted since the beginning of 2009, and exerted strong upward pressure on the domestic price level. While international oil prices rose 70 percent year-on-year between April 2009 and April 2010, the International Monetary Fund (IMF) commodity price increase experienced a 49 percent increase.

The document said that in case of Pakistan, the increase in domestic prices of commodities remained relatively more muted as compared to international price movements. However, since January 2010, international prices for some of the commodities shown, barring petroleum, fell more rapidly than in the case of Pakistan. The sharply higher contribution of non-perishable items to inflation could indicate, among other things, the impact of transportation costs on the structure of food price. In terms of large-weigh individual items, the biggest contribution to year-on-year inflation in April came from the increase in House Rent Index (HRI) at 13.26 percent, followed by milk 2.63 percent, sugar 1.11 percent, etc.

The loss of the rupee value contributed to the spike in inflationary pressure over the past two years. Increase in the domestic procurement price of wheat, residual aggregate demand pressure in the economy emanating from substantial transfer to the rural economy on account of an unprecedented government-run commodity procurement program and healthy increase in workers' remittances contributed to inflationary pressures. The 'washing out' of a favourable base effect wad exerting a negative influence on inflation in comparison to levels witnessed a year ago and is likely to intensify over the next few months.

According to the Survey, in terms of inflation mitigation strategies, policy options were fairly limited in the short run. The strategy of improved availability through better administrative measures against hoarding was likely to have some effect at the margin. The Survey adds: "The revival of the price magistracy system can also be an effective 'localised' tool in the fight against price inflation in essential food items."

Copyright Business Recorder, 2010